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Wednesday, October 20, 2010

Phil Flynn: Shanghai Surprise

Did China’s surprise interest rate increase rebalance what seemed to be an out of balance global economy? Will this interest rate increase take the heat off the Chinese who are under increasing US pressure to set their currency free? China crushed the runaway commodity complex when it raised its benchmark deposit and lending rates by 0.25 percentage point yesterday for the first time since December 2007. The move was to stem domestic inflation but it could be the first of a series of rate increases could also be seen as a move gesturing to the US for our restraint by not declaring them a currency manipulator.

In the real world a currency that is allowed to float would normally increase the value of its currency. The Chinese, by raising interest rates, it was almost like a de facto increase in the value of their currency. By doing that it raised worries that even a slight slowing in the Chinese economy could slow the growth of neighbors and the uncertainty surrounding their next move improved the value of our beaten down greenback. It also reduced the price of commodities that threatened to derail the global economic recovery. We all know that the US is pressuring China to increase the value on their yuan and that commodities have......Read the entire article.